Most annuities include a death benefit, but what it pays depends on the type you own

Yes, most annuities have a death benefit. If you die before the annuity starts paying you, your beneficiary receives either the money you put in or the current value of the contract — whichever is larger. If you die after payments have started, what your beneficiary receives depends on which payout option you chose when you set up the annuity. Some options pay nothing after you die; others continue paying your beneficiary for years.

The death benefit is one of the biggest differences between annuities and other retirement savings. It protects your money if you don't live long enough to collect what you paid in. But the protection comes with a cost: annuities that offer larger death benefits typically pay you less each month than annuities with smaller ones.

Key Takeaways

  • Before your annuity starts paying you, the death benefit is usually the amount you invested or the current contract value, whichever is higher.
  • Once payments begin, the death benefit depends on your payout option — some options pay your beneficiary for life, others pay nothing after you die.
  • A joint-and-survivor option continues payments to your spouse or beneficiary after you die, but your monthly payment is lower than a single-life option.
  • The insurance company deducts any withdrawals you made before age 59½ from the death benefit, and your beneficiary may owe income tax on what they receive.

What your beneficiary gets if you die before payments start

If you purchase an annuity and die before the first payment arrives, your named beneficiary receives a death benefit. In most cases, this is the greater of two amounts: the total premium you paid into the contract, or the current value of the annuity account. This protects your heirs if the annuity's investments have lost value.

Some annuities offer an enhanced death benefit rider that guarantees a higher payout — for example, your original investment plus a percentage increase each year. This rider costs extra and reduces your monthly income once payments begin. You choose whether to add it when you first buy the annuity.

How payout options affect what your beneficiary receives

Once your annuity starts sending you payments, the death benefit changes based on which payout option you selected. The insurance company offers you several choices, and each one has different consequences for your beneficiary.

A life-only option pays you the highest monthly amount, but payments stop when you die. Your beneficiary receives nothing. This option makes sense only if you have other savings or if you are confident you will live a long time.

A joint-and-survivor option continues payments to your spouse or another beneficiary after you die, usually at the same amount or a reduced amount. Your monthly payment is lower than life-only because the insurance company expects to pay for two lifetimes instead of one. You choose the survivor's benefit when you set up the annuity — typically 50%, 75%, or 100% of your payment.

A period-certain option guarantees payments for a set number of years — often 10, 15, or 20 years. If you die before the period ends, your beneficiary receives the remaining payments in a lump sum or in installments. If you outlive the period, you continue receiving payments for life, but your beneficiary gets nothing after you die.

A life with period-certain option combines the two: you receive payments for life, but if you die within the may provide period, your beneficiary receives the remaining payments. This option costs more than life-only but less than joint-and-survivor.

Early withdrawal penalties and how they affect the death benefit

If you withdrew money from your annuity before age 59½, the insurance company typically reduces your death benefit by the amount of those withdrawals plus any surrender charges. This is because early withdrawals trigger a 10% federal tax penalty, and the insurance company deducts this from what your beneficiary would otherwise receive.

Once you turn 59½, withdrawals no longer trigger the 10% penalty, so they no longer reduce the death benefit. However, your beneficiary will still owe income tax on the full amount they receive, because annuity earnings are taxed as ordinary income.

Income tax your beneficiary will owe

When your beneficiary receives the death benefit, they must pay income tax on the earnings portion — the difference between what you paid in and what the annuity is worth. The principal you invested is not taxed again, but everything the annuity earned is taxed as ordinary income in the year your beneficiary receives it.

If the death benefit is large, your beneficiary may end up in a higher tax bracket. Some beneficiaries ask the insurance company to spread payments over several years instead of taking a lump sum, which can reduce the tax hit. The insurance company can explain what options are available for your specific annuity.

Comparing death benefits across annuity types

Different kinds of annuities offer different death benefits. A fixed annuity guarantees a minimum death benefit — usually your principal or the contract value, whichever is higher. A variable annuity may offer a stepped-up death benefit that increases if the market performs well, or it may offer a may provide minimum. An indexed annuity typically guarantees your principal as the death benefit.

when ready annuities, which start paying you right away, often have smaller death benefits than deferred annuities, which wait years before payments begin. This is because when ready annuities are designed to convert your savings into income quickly, leaving less to pass on. If leaving money to your heirs is important, a deferred annuity or an when ready annuity with a joint-and-survivor option may be a better fit.

What to tell your beneficiary about your annuity

Your beneficiary will need to contact the insurance company to claim the death benefit. Keep your annuity contract and beneficiary designation in a place where your family can find them — a safe deposit box, a file your executor knows about, or with your will. Write down the insurance company's name and your policy number.

Tell your beneficiary which payout option you chose and what it means for them. If you chose life-only, they should know they will receive nothing. If you chose joint-and-survivor, explain what percentage they will receive and for how long. This prevents surprises and gives them time to plan for the tax bill.

Frequently Asked Questions

Can I change my death benefit option after I buy the annuity?

No, you cannot change your payout option after the annuity starts paying you. You must choose your option when you purchase the annuity or when you begin taking payments. Before you commit, ask the insurance company to show you the monthly payment for each option so you can compare.

What if I name my estate as the beneficiary instead of a person?

The death benefit will go to your estate and be distributed according to your will. This takes longer than naming a person directly and may cost more in probate fees. Naming a specific person — your spouse, child, or trusted friend — is usually faster and cheaper for your beneficiary.

Does my beneficiary have to take the death benefit as a lump sum?

Not always. Many insurance companies offer the option to spread the death benefit over several years, which can reduce your beneficiary's tax bill. Ask your insurance company what options are available for your annuity before you die, so your beneficiary knows what to request.

If I die during the surrender period, does my beneficiary still get the full death benefit?

Your beneficiary receives the death benefit minus any surrender charges the insurance company applies. Surrender charges typically decrease each year and disappear after five to ten years. Check your contract to see when your surrender period ends.

Can my beneficiary refuse the death benefit?

Yes, but this is rare. Your beneficiary might refuse if accepting the benefit would push them into a higher tax bracket or affect their may be able to access for means-tested programs. They should speak with a tax professional or financial advisor before deciding.